Aug 10, 2018
As a valued resource for many of our brokers across the state, LISI gets various questions on benefits and compliance. With Q4 approaching, now is the time to study and prepare to answer questions that commonly come up during open enrollment. Over the next several months, we will take some time to provide clarity on some common areas of confusion.
Q: We offer a general-purpose health flexible spending account (FSA) with a grace period. We are introducing a HDHP and an HSA benefit at our renewal. How will the grace period affect eligibility for employees who elect the HDHP and want to establish/contribute to an HSA?
A: A grace period is an additional period (up to 2 and a half months) after the end of the FSA plan year. During the grace period, a participant may incur and submit claims for reimbursement. (Note: a grace period is not the same thing as a run-out period, which is a period after the plan year ends in which to submit expenses that were incurred during the plan year.) A grace period for a general-purpose health FSA may affect an individual’s HSA eligibility. Participants with more than a $0 balance at the end of the plan year cannot establish or contribute to an HSA until the first of the month following the end of the grace period.
For example, for a general-purpose health FSA that runs on a calendar year with a 2 and a half month grace period, any participant who has more than a $0 balance on December 31st will be ineligible to establish or contribute to an HSA until April 1st. Employers that are introducing an HDHP/HSA option for the first time may want to consider converting the grace period for a general-purpose health FSA to a limited-purpose or post-deductible FSA to ensure HSA-eligibility at the start of the new plan year. However, it’s important to keep in mind that the conversion must apply to all plan participants so it may be an unpopular result for participants who are not electing HDHP coverage or are not planning to establish an HSA.
Finally, an FSA grace period is separate from an FSA carryover provision, which also affects HSA-eligibility.
Contact your LISI Regional Sales Manager to find out more.
